415 Limits and Controlled Groups

[Alex Daisy]

I am trying to help a client who currently has a 401k new comp plan. They also have director's fees from a foreign subsidiary that they own 78% of. Would they be able to shelter any of the director's fees in a SEP, Keogh, etc.? I have been told that the 415 limits apply but I thought that only related to the deferral limits and profit sharing amounts in a defined contribution plan of a non controlled group. They plan on maxing out in the new comp plan between the profit sharing portion, employer match, and elective deferral. They are over 50.

Would the be able to set up a SEP or Keogh Defined Benefit Plan to shelter some of the directors fees?

[Mike Preston]

Not nearly enough information. "a client" means: 1) sole prop 2) corp 3) other. Ownership of "a client" is, what, who, exactly? Other 22% of sub owned by whom? Type of work that "a client" does? Type of work that subsidiary does? Do they work for each other? That is just the tip of the iceberg. Basically, you are trying to see whether the entity sponsoring the plan is related to the entity that receives or pays the director's fees. It can get complicated.

[Guest Sieve]

Director's fees are self employment income for a director (Self). If Self also owns, or is treated as owning, at least 80% of another entity (even the one on whose Board Self sits), then there's a controlled group & Self must be included in coverage testing for other entity and other entity must be included in testing for Self. If there is no controlled group, Self can have his/her own plan.

There are special controlled group rules for purposes of Section 415 (see 415(h))--and, contrary to your belief, there is only one 415 limit for each employee in a controlled group. If Self is maxing out in a plan of another member of the controlled group (a group which inlcudes Self the Board member) , then his/her 415 limit has been reached.

It's much more complicated than that, of course--Mike has presented some of the questions that are pertinent to the inquiry--but it's Self's 100% ownereship of Self's business (director's fees) that causes the potential 414(b) & © issues which impact 410(b) and other provisions. And don't forget to consider the affiliated service group rules, too.

[BeckyMiller]

Sieve mentioned 415(h) but didn't note what it said. This is a frequently overlooked provision. It says:

415(h) 50 PERCENT CONTROL. --

For purposes of applying subsections (b) and © of section 414 to this section, the phrase "more than 50 percent" shall be substituted

for the phrase "at least 80 percent" each place it appears in section 1563(a)(1).

In other words, you can have a controlled group for purposes of the 415 limit at more than 50 percent level of ownership, rather than the traditional at least 80 percent.

[Guest Sieve]

. . . but, as the statute says, the substitution of language ("more than 50%" for "at least 80%") only applies to IRC Section 1563(a)(1), which is the parent-sub controlled group rule. It does not apply for purposes of the brother-sister controlled group rule (which is IRC Section 1563(a)(2)). An often overlooked twist to an often-overlooked Code provision.

[BeckyMiller]

Another good point! Thanks Sieve.